Lays Potato Chips: The Crunch is On

Just because your company is successful doesn’t mean you can rest on your laurels. Taking a proactive approach to remain successful in the future requires foresight, recognition of changes in the marketplace and effective analysis of the competition. These are the steps that leaders at Frito-Lay North America took in order to defend their lead in the snack food industry and respond to market changes that threatened Frito-Lay’s dominance. They provide a valuable lesson for others.

The History of the Chip

A beloved brand since 1932, Americans had historically been very loyal to Lay’s potato chips. Frito-Lay, the chip’s manufacturers, had weathered many diet and health fads. However, in 2007, a more substantial change in customer consciousness was afoot: consumers were beginning to show more and more preference for organic, healthy and locally sourced foods. Leaders at Frito-Lay North America grappled with whether to change the composition of their popular Lay’s potato chips in response to these changing consumer preferences.

As a leading snack food company, Frito-Lay North America merged with PepsiCo in 1965. Their Lay’s chips also boasted an astounding 99 percent consumer awareness. The company was also no stranger to sustainability efforts, an integral part of PepsiCo’s strategy. As early as 1991, the company installed “Green Teams” in its plants to ensure environmental compliance.

To meet market demands, PepsiCo launched its “Smart Spot” program in 2005 to help consumers identify healthier snack food choices. Frito-Lay brands, such as SunChips, Rold Gold and Baked!, were in the “Smart Spot” product portfolio. In 2006, Frito-Lay launched the “We Grow the Best Snacks on Earth” campaign, which focused on the fact that Lay’s chips included three ingredients: potatoes, oil and salt.

Their goal in the campaign was to show consumers that they weren’t a purveyor of “junk food” loaded with artificial ingredients, but rather, a company whose core products were natural.

The Healthy Road Takes a Turn

The plan initially seemed to work as snacks in the “Smart Spot” program saw double-digit revenue growth by 2007. Then, conditions took a downward turn. By the end of 2007, fewer consumers were choosing Frito-Lay’s products.

Several factors were affecting consumers’ relationships with snack foods. The Great Recession beginning in 2008 led shoppers to opt for less expensive brands, and an increasingly identifiable demographic devoted to “Lifestyles of Health and Sustainability” (LOHAS) preferred products displaying words such as, “organic,” “natural,” “whole-grain” and “locally owned.” In addition, a growing trend toward eating on the go, combined with talk of government legislation intended to tax less-healthy foods was also having an impact on the food industry.

Frito-Lay Strikes Back

In an effort to revitalize the brand and win back consumers, Lay’s launched a new campaign in 2009. “Lay’s Local” introduced consumers to five farmers who grow potatoes for Lay’s chips. The idea was to show consumers how localities play a role in developing Frito-Lay’s products. The company also created a “chip tracker” so consumers could learn where their chips were made. Other efforts included the use of electric trucks to deliver Lay’s products. Frito-Lay tried a number of initiatives, some of which were less successful. For instance, new compostable packaging for Sun Chips proved less popular with consumers who liked the idea of biodegradable packaging but complained about the noise the bags made.

Nevertheless, on the whole, the initiatives proved effective. The efforts ultimately won back some of Frito-Lay’s consumers. By 2010, Frito-Lay made more than $13 billion in revenue. Their Lay’s brand products once again enjoyed majority unit market share.

The company held its own as it continued to tell its story of sustainability and simple, locally sourced product ingredients.

The Lesson

Leaders at Frito-Lay recognized that the marketplace had changed and understood the need to improve on their competitive position moving forward. In this case, the company looked at their existing capabilities, tangible and intangible, before they made a decision to either change or capitalize on such capabilities. Doing so required strategic considerations such as examining the processes, people and systems that enabled them to create value for their customers — three simple ingredients indeed.

In addition, Frito-Lay leaders proactively defended their market share against competitors through storytelling — shaping a narrative to help stakeholders better understand their company’s mission and products. The firm’s true accomplishment arose from its ability to understand its distinctive capabilities and communicate that value proposition to customers, leading to substantial competitive advantage.

About the Faculty

Harris is an expert on both ethics and strategic management. His research centers on the interplay between ethics and strategy, with a particular focus on the topics of corporate governance, business ethics and interorganizational trust. Harris has written extensively on the topics of executive compensation and other governance-related topics.